Richard Leftley sets the record straight on the issues facing microinsurance specialists that operate in the developing world
Providing a range of insurance products to low- and middle-income clients in the developing world is always going to be a challenge, but the demands faced by microinsurance specialists differ from those of the mainstream insurance industry.
Contrary to popular belief, pricing microinsurance products is not a major problem, even with the inevitable lack of mortality and morbidity data. This is because the products sold have small sums insured, the period of cover is short and the number of people covered is relatively large. These factors contribute to a stable loss ratio once the product is at scale. Pricing can be altered relatively quickly, due to the short period of cover, to ensure that the risk rate is sufficient. More significant than the risk rate is the cost of selling and administering the product, which is often overlooked by mainstream insurers entering the market.
The premiums for these products are often just a few dollars. If 20% of the gross premium is set aside for sales and administration then this may not translate into enough cash, especially if the role of sales is outsourced to a third party. A vicious circle can develop whereby the third party tasked with sales and administration does not receive enough cash and so in turn is not motivated to push sales or provide good customer service, which in turn means that the loss ratio is highly unstable due to the low take-up.
Scale is important, therefore, not only in ensuring a stable loss ratio but also so that the sales and administration of microinsurance products are sustainable. The key focus for any new programme is, therefore, how to reach scale as quickly as possible. Our experience has led us to believe that the best way to reach scale is by partnering with organisations that have a strong brand and level of trust with the mass market, have points of sale that are accessible and have the ability to handle cash for premiums and claims.
Many new entrants to the microinsurance market have focused their attention on the providers, known as microfinance institutions (MFI's), because they are trusted by the poor and their loan officers are field-based. In fact, most microinsurance programmes have piggybacked the MFIs by providing simple credit life tied to the loan. The MFI market is estimated at approximately 150m families globally and yet the number of people without insurance is close to 4 billion. MFIs are a great starting point but we have to work with other partners if we want scale.
Our team decided four years ago that to maximise scale we needed to work not only with the MFIs, but also with the mobile network operators because of their reach in developing countries. The issue we faced was: "Why would they want to work with us?" We knew that most mobile networks struggled with subscriber loyalty. Clients were using multiple SIM cards and spreading their pre-paid airtime purchases across multiple mobile networks to benefit from frequent sales promotions.
Benefits of loyalty
Our approach to the mobile networks was aimed at maximising subscriber loyalty as measured by an increase in purchases of pre-paid airtime, and a reduction in churn of subscribers. We believed that while few people woke up each morning wanting to buy insurance, many of our target clients woke up worried about how they would cover the cost of a funeral, sickness or natural disaster. If we addressed these risks then we would be able to increase loyalty to a given mobile operator.
We have convinced the mobile operators that if they offer free insurance to their subscribers, the cost of the premiums will be more than offset by the increase in loyalty. Millions of clients across Africa and Asia have been signed up to insurance for the first time by using this approach. Interestingly, this concept of using insurance as a way of driving loyalty has also worked for banks in Africa who find that they have a majority of clients who maintain uneconomically low average monthly balances in their deposit accounts.
One microinsurance product that has yet to benefit from scale is agricultural insurance used to protect smallholder farmers against crop loss. The small plot sizes and geographical disbursement of smallholders mean that manual loss verification is expensive and, therefore, unsustainable. In 2004, MicroEnsure was an early pioneer in introducing parametric weather index insurance that used rainfall as a proxy for crop yield in Malawi.
As an industry we hoped that weather index insurance would provide a mechanism for simply clarifying whether claims were payable. However, reaching scale has been hindered by the lack of weather stations to provide the basis for pricing and payout. Simply building new weather stations does not necessarily solve the problem, as underwriters typically require 30 years of historical data to price products. Recently, we have invested heavily in developing models that use satellite data as an alternative to weather stations. In many situations, remotely-sensed data is a viable tool for providing weather index insurance products in areas that were previously uninsurable.
While many of the technical challenges to providing weather index insurance have been overcome, agricultural products remain far behind other microinsurance products in terms of scale. This will be the next challenge to address if these products are to succeed. Weather index products can be sold to individual farmers via group policies through a cooperative, microfinance organisation or commercial bank, or at a macro-level to governments or aid organisations for wider areas.
Most practitioners now agree it is impractical to sell weather index insurance to individual farmers as it is just too costly. Many have misgivings about selling insurance to a government body as it is unclear that the money will filter down to the farmers themselves following a claims event. So sales are focused on groups of farmers. The most obvious way to reach farmers is to embed weather insurance into loans made to smallholders to purchase farm inputs such as fertiliser and seeds. This has worked, yet the number of loans being made in the sector remains quite small relative to the potential market.
Most recently we have sought to embed weather insurance into contract farming and seed suppliers' offerings in an attempt to drive farmer loyalty. In essence, we are learning from our experience with the mobile network operators and wondering if loyalty can underpin a significant leap in scale for weather index insurance. Time will tell.